Due to the auto-enrolment rules, more people than ever have some personal pension savings. In some cases, personal pensions can form a significant portion of financial wealth. But do you know what will happen to this money when you pass away?
Our advisers can help you review your existing pension savings to ensure the money will be distributed in a way which suits your wishes, while minimising any immediate and future tax charges you and your family could face.
Unfortunately, we regularly deal with pensions following death. If you are in the unfortunate position of dealing with someone’s estate you might find it beneficial to speak with an adviser to assess your options and avoid any potential mistakes.
Your pension provider(s) will ask you to nominate a beneficiary, or beneficiaries. When we meet with a new client we often find they have not nominated anyone or that the nomination is out of date.
Even if you do nominate someone, this might need to be changed over time. For example, it is common for employers to change a workplace pension scheme to a new provider. If this happens you will need to submit a new nomination for the new provider because it probably won’t carry across from the previous provider. You should also be mindful of changes in your personal life over time, including new children being born, a change in partner, or the death of a partner.
If no money has been taken from the pension when you die, or you have chosen to take a flexible retirement income
Your beneficiaries can usually withdraw all the money as a lump sum or set up a guaranteed income (an annuity). They may also be able to keep the money within a pension of their own and set up a flexible retirement income. These options are available even if the beneficiary has not reached the normal minimum pension age (although some providers cannot accommodate all death benefit options for under-18s).
Many providers will only offer a lump sum or annuity option. However, if you beneficiary wants to take a flexible retirement income, they may be able to move the pension to another provider. You can find out what options are available from your provider, either by asking them or reviewing the “Key Features Document”. Alternatively, book a meeting with one of our advisers and we will contact the provider on your behalf.
If you had set up a guaranteed income (an annuity)
The derath benefits will depend on the options you selected when the annuity was set up. If the annuity was taken out on a joint life basis your beneficiary will continue to receive a proportion of the income you were receiving. However, if you opted for a single life annuity, the payments will stop when you die.
If you selected a guarantee period and died within the guarantee period your beneficiary will continue to receive the income you were entitled to, up until the end of the guarantee period. It is also possible that a lump sum could be payable, but only if “value protection” was selected at outset.
The payment of death benefits can affect several different taxes.
Death benefits from a pension might not included in an estate for inheritance tax purposes, as long as:
- The death benefits are payable at the discretion of the pension provider (some pension providers will allow you to over-rule their decision, but this is likely to result in negative inheritance tax consequences)
- The death benefits are paid out within two years of death
- Someone was nominated to receive the death benefits (otherwise the pension provider might pay the death benefits into the deceased person’s estate)
- A transfer, or significant pension contribution, was not paid into the scheme shortly before the person passed away
Income tax might be payable on pension death benefits, but normally only if the deceased person was 75 or older.
Finally, a Lifetime Allowance charge might be payable if the death benefits exceed the deceased person’s available Lifetime Allowance.
It is important to plan ahead with pension death benefits. For example, if the beneficiary takes a cash lump sum this money will then be included in the beneficiary’s estate for inheritance tax purposes. This could result in a future inheritance tax bill from money which was originally free from inheritance tax.
This article is very brief but pensions are very complex. The tax treatment and death benefit options of your particular pension scheme could easily differ from the standard rules as set out in this article. If you are in any doubt, please contact your provider or seek advice.
Please also bear in mind this article only relates to defined contribution/personal pension benefits. Other types of pension scheme will have different rules and different death benefits.